Overview
The industry entered into 2025 with higher-than-expected medical and pharmacy expenses or trends. In the 2025, the industry reported an elevation of respiratory claims driven by flu, COVID and pneumonia, according to AM Best. Beinsure analyzed the report and highlighted key trends.
5 Key Highlights
- AM Best downgraded the U.S. health insurance segment outlook from Stable to Negative, citing accelerating medical utilization, rising costs, and structural strain across both commercial and government programs.
- Medical and pharmacy expenses surged industrywide, driven by increased physician visits, inpatient and ER use, behavioral health claims, and the soaring cost of specialty and GLP-1 drugs.
- Post-pandemic Medicaid redeterminations removed lower-risk members, leaving a higher-acuity population. Many disenrolled individuals shifted to ACA exchange plans, worsening those risk pools and raising claims severity.
- Underwriting earnings dropped sharply through late 2024, and carriers entered 2025 with higher-than-expected medical and pharmacy trends. Respiratory illnesses like flu, COVID, and pneumonia further strained results in early 2025.
- To manage through 2027, insurers are tightening pricing models, redesigning plans, expanding value-based care, and strengthening provider partnerships. Some may exit unprofitable markets, particularly in Medicare Advantage.
Outlook for the U.S. health insurance segment
AM Best changed its outlook for the U.S. health insurance segment to Negative from Stable, citing growing medical utilization, higher treatment costs, and structural pressures across the market.
The Best’s Market Segment Report: Market Segment Outlook – U.S. Health Insurance says the industry is facing a broad rise in medical spending, driven by more physician visits, increased use of specialty and weight-loss drugs, and higher coding intensity reflecting greater member acuity.
Industry Size & Market Growth
- The U.S. health insurance market was estimated at about $1.5 tn in 2024 and is projected to grow to around $2 tn by 2029.
- The group (employer-sponsored) health insurance market was estimated at $1.41 tn in 2024, with a CAGR of about 2.2% from 2025 to 2030.
- Supplemental health insurance (coverage beyond primary health plans) in the U.S. was valued at ~$38.6 bn in 2024, and is forecasted to hit $66.45 bn by 2034 (CAGR ~5.6%).
Jennifer Asamoah, senior financial analyst, and Bridget Maehr, director at AM Best, discussed the report’s findings with AM Best TV.
Rising Medical and Pharmacy Costs
Asamoah said the industry is seeing higher medical and pharmacy expenses across nearly all lines of business. Specialty drugs remain a key driver, while the rapid growth of GLP-1 usage continues to push overall spending higher.
The report points to notable increases in physician visits, inpatient admissions, and emergency room usage.
Behavioral health claims also climbed, along with a rise in coding intensity among managed Medicaid members.
Health Insurance Coverage & Enrollment
- In 2025, the estimated uninsured rate for the U.S. population was 8.2%, or about 27.1 mn people.
- From January–September: among adults aged 18-64, 11.1% were uninsured; 69.4% had private health insurance and 21.2% had public coverage.
- Approximately 319 mn people received medical coverage from U.S. health insurers.
Underwriting earnings weakened sharply through late 2024 as health plans entered 2025 with heavier medical and pharmacy costs.
In early 2025, claims related to respiratory illnesses – flu, COVID, and pneumonia – spiked again, adding more pressure.
Insurance Cost Trends & Utilization
- Medical cost trend forecasts for 2026: Group market ~8.5%, Individual market ~7.5%. Pharmacy cost trend is ~2.5 points higher than medical trend.
- Private health-insurance spending in the U.S. projected to grow by 7.6% in 2025 (down from ~10.4% in 2024).
The industry as a whole also reported an increase in behavioral health claims, as well as an increase in coding intensity, which is reflected in member acuity for managed Medicaid members.
“The trend seems to increase in the later part of 2024 with underwriting earnings declining materially through the end of the year”.
Adjusting to the GLP-1 Surge
According to Asamoah, insurers have been forced to rethink their approach to GLP-1 coverage. Usage and prescription rates for these drugs have soared, prompting health plans and employer groups to modify their benefits for 2025.
“Many plans now only cover GLP-1s for medical conditions other than weight loss,” she said, noting the shift reflects both financial considerations and utilization trends that are outpacing earlier forecasts.
Deterioration of Risk Pools
Maehr explained that risk pool deterioration is most evident in Medicaid and the Affordable Care Act individual markets.
During the COVID public health emergency, states were prohibited from disenrolling Medicaid beneficiaries, leading to a large increase in membership.
When redeterminations resumed, enrollment dropped sharply, and those who remained tended to have higher medical needs.
“The healthier, low-utilization members left the pool, leaving behind a population with higher acuity,” Maehr said.
During the public health emergency, which was enacted due to the COVID pandemic, states were not allowed to disenroll Medicaid members.
During this time the Medicaid enrollment increased as people lost employer coverage or became eligible for Medicaid based on lower wages. The completion of the eligibility redeterminations saw Medicaid enrollment drop significantly.
Bridget Maehr, AM Best director
In the individual marketplace, many former Medicaid enrollees who lost eligibility transitioned to ACA exchange plans. Because they typically use more health services, this migration worsened the risk mix and increased claims costs.
Maehr added that rate adjustments will lag these changes since premiums are based on historical data, not the current health profile of the insured population.
Preparing for Ongoing Pressures
AM Best expects these headwinds to persist through at least 2027. To cope, Maehr said insurers are focusing on pricing accuracy, plan design, and tighter cost controls.
Health plans are reevaluating administrative structures, strengthening care management programs, and leaning further into value-based care models to control medical spending. Strategic provider partnerships will also be central to cost discipline.
Some insurers may choose to exit specific markets or geographic areas, particularly within Medicare Advantage, where margin pressure remains acute.
Maehr said Medicaid faces its own challenges, including funding reductions tied to new work requirements and more frequent eligibility reviews.
These changes, enacted through the One Big Beautiful Bill, will require significant administrative upgrades from participating plans.
The average Herfindahl-Hirschman Index (HHI) in commercial health-insurance markets (MSA-level) was 3,458 in 2024, indicating high market concentration. In 89% of MSAs at least one insurer held ≥30% market share; in 47% one insurer held ≥50%.
Insurers, she said, are now racing to build the infrastructure needed to handle those adjustments while trying to keep coverage affordable and sustainable in an environment where every cost curve points up.
FAQ
AM Best shifted the outlook from Stable to Negative due to mounting medical utilization, rising treatment costs, and persistent structural pressures. The firm cited escalating pharmacy expenses, increased specialty and GLP-1 drug use, and deteriorating Medicaid and individual market risk pools as key drivers behind the downgrade.
According to AM Best, physician visits, inpatient admissions, emergency room use, and behavioral health claims all climbed sharply. Specialty and weight-loss drugs are consuming larger portions of medical budgets. The spike in respiratory claims tied to flu, COVID, and pneumonia in early 2025 further intensified financial strain on insurers.
Insurers have been forced to adjust coverage policies after GLP-1 prescriptions surged. Many health plans and employer groups have limited coverage to GLP-1 use for conditions other than weight loss to manage costs. The shift reflects both financial pressure and utilization levels that exceeded expectations heading into 2025.
During the COVID public health emergency, states could not disenroll Medicaid members, inflating enrollment. Once redeterminations resumed, low-utilization members dropped off, leaving a population with higher medical needs. At the same time, many who lost Medicaid eligibility moved to ACA exchange plans, worsening those pools with higher-acuity enrollees and driving up claims.
Premium rates are lagging behind new risk realities because they’re based on historical claims data. As a result, insurers face mismatched pricing in both Medicaid and individual markets. Underwriting earnings declined through late 2024, and many carriers entered 2025 with heavier-than-expected medical and pharmacy costs that continue to erode margins.
Plans are focusing on precise pricing, smarter benefit design, and stricter cost control. Many are enhancing care management and expanding value-based care programs to manage rising morbidity levels. Strategic provider partnerships are also being strengthened to control medical costs more effectively.
AM Best expects elevated medical costs and utilization to persist through at least 2027. Medicaid will face additional strain from funding cuts, new work requirements, and more frequent eligibility reviews under the One Big Beautiful Bill. Insurers are racing to upgrade administrative systems to comply while maintaining affordability and coverage continuity in an increasingly costly environment.
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AUTHORS: Jennifer Asamoah – senior financial analyst, Bridget Maehr – director at AM Best, John Weber – AM Best’s senior associate editor
Edited by Nataly Kramer – Lead Insurance Editor at Beinsure Media
